On 27 July 2020, the Luxembourg Government introduced a draft law that would allow the issuance of dematerialized securities using distributed ledger technology (DLT) or blockchain. While previous amendments to existing legislation have tentatively incorporated DLT, this recent move aims to take things one step further, enabling tokens to be treated as dematerialized instruments. The bill offers two major changes.
In its first change, the bill now determines that DLT-based issuance accounts may be used for dematerialized securities. Previously, the Law of 1 March 2019 enabled custodians to register and hold their securities by way of ‘secure electronic registration devices, including distributed electronic registers or databases,’ referring to DLT and blockchain-based “securities accounts”. Its scope only covered the registration and transfer of securities by custodians.
However, an organization acting on behalf of the issuer, the central account keeper, has to keep a centralized record of the issued securities in an “issuance account”. Dematerialized securities issuance accounts are used for record-keeping purposes, recording the type and amount of securities issued. The latest law now enables issuance accounts to be based on DLT, as highlighted by lawyers Arendt.
The second major change proposed is that the scope of who may act as the central account keeper for non-listed debt securities has broadened. This lifts the restriction that only licensed Luxembourg service providers can assume this role. As long as they have been authorized in a Member State of the European Economic Area, foreign credit institutions and investment firms can now act as central account keepers. However, they will need adequate IT security and other technological and organizational mechanisms.
There is the potential for a distributed ledger itself to be the central account keeper, but the Luxembourg law will still require a service provider to assume responsibility.
Luxembourg has been slowly but surely modernizing its financial framework. The Law of 1 March 2019 amended the Law of 1 August 2001 on the circulation of securities, cautiously introducing the concept of DLT and blockchain, but it primarily related to custodians for registration and securities transfers. This newest bill will amend the law of 6 April 2013 on dematerialized securities, and the law of 5 April 1993 on the financial sector.
Companies have also already managed to use the updated laws to innovate traditional securities issuance methods. In January 2019, German companies Continental, Commerzbank, and Siemens used a blockchain platform for a pilot money transaction, issuing securities without the need for a broker. The whole process took only minutes and was conducted in compliance with Luxembourg law. If the new law is enacted, Commerzbank could also act as the central account keeper.
